On April 14, 2016, the Fourth Circuit issued a published opinion in St. Paul Mercury Insurance Co. v. American Bank Holdings, Inc., a civil case concerning the denial of insurance coverage based on untimely notice to the insurer by the insured of the underlying claim. American Bank Holdings, Inc. (“American Bank”) was served with a complaint and summons that went unanswered, resulting in a default judgment of $98.5 million against it. Eight months after receiving the summons, American Bank notified its insurance company, St. Paul Mercury Insurance Co. (“St. Paul Insurance”), of the lawsuit, and St. Paul Insurance denied coverage due to the late notice. American Bank incurred $1.8 million in having the default judgment vacated and the lawsuit dismissed. The parties filed cross-motions for summary judgment, both seeking declaratory judgments regarding reimbursement of the legal fees incurred by American Bank. The district court entered judgment for St. Paul Insurance, and the Fourth Circuit affirmed, finding that American Bank failed to provide notice “as soon as practicable,” as required by the terms of its insurance policy, and that the late notice caused St. Paul Insurance prejudice. Thus, St. Paul Insurance was within its right to deny coverage.

Facts & Procedural History

On June 11, 2008, Amiel Cueto filed an action against American Bank (a Maryland company) and ten other defendants in Illinois state court alleging that they caused an $8 million sale of Cueto’s real property to collapse. Both parties agreed that the suit was frivolous. The complaint and summons were served on June 18, 2008, on CT Corporation—American Bank’s designated agent for receiving service of process in Maryland. The next day, CT Corporation sent the papers to American Bank’s office, addressed to the CFO, in accordance with the terms of their agency. The CFO-addressee, however, had left the employ of American Bank, and the suit went unanswered. A $98.5 million default judgment against American Bank was entered on July 23, 2008.

American Bank received collection papers from Cueto on February 13, 2009, which were forwarded to St. Paul Insurance on February 25, 2009. This was the first time St. Paul Insurance had any knowledge of the suit, the default judgment, or the collection papers. On February 27, 2009, American Bank’s general counsel contacted St. Paul Insurance’s claims counsel and asked “if [they] were covered for this,” to which the claims counsel responded “yes.” However, after the investigation that followed, and multiple draft letters that “reserved the right to deny coverage due to late notice,” St. Paul formally notified American Bank that it was denying coverage due to a lack of timely notice.

Even before notifying St. Paul Insurance of the default judgment, American Bank had retained the law firms Bryan Cave and Sidley Austin in efforts to vacate the default judgment and dismiss the lawsuit, resulting in approximately $1.8 million in legal fees and costs. St. Paul Insurance sought a declaratory judgment that it had no duty to provide coverage to American Bank because American Bank failed to provide it with timely notice of the Cueto suit, as required by the policy. American Bank filed a counterclaim for a declaratory judgment that it was covered under the policy and for damages of reimbursement of the $1.8 million, and a claim under Maryland law for a lack of good faith in denying insurance coverage. The district court entered judgment in favor of St. Paul Insurance, concluding that American Bank had provided late notice of Cueto’s suit and that St. Paul Insurance had suffered prejudice as a result. On appeal, American Bank contended that it provided timely notice to St. Paul and that material factual disputes precluded summary judgment against it with respect to its waiver, estoppel, and bad faith claims.

Timely Notice

The Fourth Circuit affirmed the district court’s conclusions. To start, the Court held that American Bank failed to provide timely notice under the policy, which provided:

The Insureds shall, as a condition precedent to their rights under this Policy, give to the Insurer written notice of any Claim made against the Insureds as soon as practicable, but in no event later than: (a) sixty (60) days after expiration of the Policy Year in which the Claim was first made . . . .

American Bank contended that, due to the internal oversight, it did not have “actual knowledge” of the action until the collection notice. The Fourth Circuit rejected this argument for two reasons. First, the Court held that “actual knowledge” was not required under the policy; the requirement to give notice was triggered by “service of a complaint,” which occurred when the complaint and summons service to CT Corporation. Second, the Court held that, in any event, American Bank was imputed with “actual knowledge” as a matter of law, as knowledge of an agent acquired within the scope of the agency relationship is imputable to the corporation. Thus, because American Bank’s duty to notify St. Paul Insurance was triggered when it was served with the complaint and summons, and because it did not provide St. Paul Insurance with notice until eight months later, it’s notice to St. Paul was not “as soon as practicable” as required by the policy.

Additionally, Maryland law requires that an insurance company establish actual prejudice resulted from the lack of timely notice. Md. Code Ann., Ins. § 19-110. The Court held that American Bank’s delay denied St. Paul Insurance the opportunity to (1) participate in the selection of counsel, (2) speak with counsel, (3) discuss credible defense strategies for dismissal, and (4) involve itself in considering the possibility of settlement negotiations. Each of these rights was part of the policy; thus, St. Paul Insurance suffered actual prejudice. Therefore, the Court held that St. Paul Insurance was entitled, by reason of late notice, to deny insurance coverage to American Bank for the Cueto suit.

Waiver and Estoppel

American Bank also contended that St. Paul Insurance waived or was estopped from asserting its late-notice defense, relying on the telephone call between American Bank’s general counsel and St. Paul Insurance’s claims counsel.

(1) Waiver. For waiver, Maryland law requires “an actual intention to relinquish an existing right, benefit, or advantage, with knowledge, either actual or constructive, of its existence, or such conduct as to warrant an inference of such intention to relinquish.” Here, the telephone conversation did not relate to the late-notice issue; in fact, the conversation did not include any discussion of notice, nor did it indicate that St. Paul Insurance was waiving any late-notice defense. Thus, St. Paul Insurance did not provide any actual intention to relinquish its rights, and the Court held that it did not waive its late-notice defense.

(2) Estoppel. For estoppel, Maryland law requires that the party asserting estoppel “have been misled to his injury and have changed his position for the worse.” Here, the Court found that American Bank’s early retention of Bryan Cave suggested that American Bank was not thinking of settlement or any form of alternative dispute resolution given the suit’s apparent frivolity. Thus, the Court held that American Bank’s estoppel argument amounted to pure speculation.

Good Faith Denial of Coverage

Finally, American Bank contended that St. Paul Insurance failed to act in good faith in denying coverage for the Cueto claim, violating Maryland statutory law. Md. Code Ann., Cts. & Jud. Proc. § 3-1701. However, the Court found that this claim also contains a statutory requirement in favor of the insured that coverage actually exists. Because American Bank failed to satisfy a condition precedent for coverage, the Court held that American Bank failed to satisfy this statutory requirement.

Disposition

Ultimately, the Court affirmed the district court’s declaratory judgment that American Bank’s late notice to St. Paul Insurance was prejudicial; thus, St. Paul Insurance had the right to deny coverage.

On February 19, 2016, in a published civil case of W.C. & A.N. Miller Dev. Co. v. Continental Casualty Co., the Fourth Circuit amended its decision from December 30, 2015, and affirmed the decision of the district court to deny W.C. & A.N. Miller Development Company (“Miller”) insurance coverage from its insurer, Continental Casualty Company (“Continental”). In 2006, Miller was sued in a contract dispute. Subsequently, Miller entered into a liability insurance contract with Continental. Miller was then sued again, in 2010, in a fraudulent conveyance action seeking recovery on the judgment entered in the 2006 lawsuit. Miller asked Continental to cover the 2010 suit. Continental, however, determined that the 2010 lawsuit was unrelated, and refused. In 2014, after Miller successfully defended the 2010 lawsuit, it sued Continental for breach of the insurance contract. The main issue was whether the 2006 and the 2010 disputes were interrelated, as defined by the insurance policy. The Fourth Circuit found that they are not.

The Facts

In the early 2000s, one of the principles of Miller founded the land development company Haymount Limited Partnerships. Miller owned more than 80% of Haymount at all relevant times. Haymount’s goal was to develop land in Virginia. In order to develop the land, Haymount needed financing. Haymount entered into an agreement with two companies to search for a third party lender, International Benefits Group (“IBG”) and American Property Consultants (“APC”). The company that introduced Haymount to the eventual third-party lender would receive a finder’s fee. Haymount secured a $14 million loan from General Motors Acceptance Corporation Residential (GMAC). Haymount then paid a finder’s fee to APC. Upon learning of the GMAC loan, IBG also sought payment of its fee and sent Haymount a list of lenders, which included GMAC, to whom IBG had introduced Haymount. Haymount refused to pay and IBG sued for breach of contract. The suit commenced in 2006, and on January 8, 2010, the district court entered judgement against Haymount, awarding $4,469,158 to IBG.

Eight months after the judgment in the 2006 lawsuit, on October 29, 2010, IBG again sued Haymount. The 2010 lawsuit alleged that the Haymount took actions to render itself judgment proof so that IBG could not collect on the judgment entered in its favor after the 2006 lawsuit. The causes of action asserted in the 2010 lawsuit included fraudulent transfer, fraudulent conveyance, common law and statutory conspiracy, and creditor fraud. The complaint included detailed information of the 2006 lawsuit, which gave rise to the judgement in favor of IBG.

Miller (Haymount’s parent corporation) entered into a liability insurance contract with Continental Casualty Company in 2010. Miller sought for Continental to cover the defense costs. Continental denied coverage as being outside the scope of the policy and Miller proceeded with the defense at its own expense and won. Miller then filed a lawsuit against Continental, alleging that Continental wrongfully denied coverage under the policy and should be required to pay the costs Miller incurred defending the 2010 lawsuit.

The policy, J.A. 35-75, provided that “More than one Claim involving the same Wrongful Act or Interrelated Wrongful Acts shall be considered as one Claim which shall be deemed made on . . . the date on which the earliest such Claim was first made. . . .” In other words, this provision stated that if more than one claim involving “interrelated wrongful acts” is made against Miller or its subsidiaries, the multiple claims are considered a single claim made on the date on which the earliest of the claims was made. Further, the policy expansively defined “interrelated wrongful acts” as “any Wrongful Acts which are logically or causally connected by reason of any common fact, circumstance, situation, transaction or event.” From this language, Continental reasoned that the acts alleged in the 2006 lawsuit and other acts alleged in the 2010 lawsuit were interrelated wrongful acts. The district court agreed with Continental and dismissed Miller’s claim.

Rules of the Case

The Fourth Circuit was tasked with determining whether the district court properly interpreted and applied the provisions of the insurance contract. Because the district court sat in Maryland, Maryland law applied to the case. Under Maryland law, insurance policies are interpreted in the same manner as contracts generally. There is no rule in Maryland that insurance policies are to be construed against the insurer. Catalina Enters., Inc. Pension Tr. v.Hartford Fire Ins. Co., 67 F.3d 63, 65 (4th Cir. 1995). Clear and unambiguous language, however, must be enforced as written and may not yield to what the parties later say they meant. Additionally, unless there is an indication that the parties intended to use words in a special technical sense, the words in a policy should be accorded their “usual, ordinary, and accepted meaning.” Bausch & Lomb, Inc. v.Utica Mut. Ins. Co., 625 A.2d 1021, 1031 (Md. 1999). However, where an insurance contract is ambiguous, “any doubt as to whether there is a potentiality of coverage under [the] insurance policy is to be resolved in favor of the insured.” Clendenin Bros. v. U.S. Fire Ins. Co., 889 A.2d 387, 394 (Md. 2006).

Reasoning

The Fourth Circuit concluded that the conduct alleged in the 2006 and 2010 lawsuits share a common nexus of fact and are, therefore, interrelated wrongful acts under the policy’s definition. The Court noted that the policy’s definition of “interrelated wrongful acts” is expansive. Additionally, the Court did not find the definition to be ambiguous and applied it in accordance with the ordinary meaning of the words used. Like the district court, the Fourth Circuit observed that the two lawsuits are linked by (1) a multitude of common facts: in particular, that Haymount did not pay IBG the finder’s fee; (2) a common transaction: the contract between Haymount and IBG; and (3) common circumstances: namely, Haymount’s attempts to secure financing for its land development project in Virginia. These elements logically and causally connected the two lawsuits. Absent Haymount’s breach of its contract and other alleged torts, IBG would not have sued for damages in 2006, nor would it have sued for enforcement of the 2006 judgment in 2010.

Miller attempts to avoid the Fourth Circuit’s straightforward conclusion by characterizing the allegations in the two lawsuits as alleging merely a “common motive” which is insufficient to establish the interrelatedness of the 2006 and 2010 lawsuits. The Fourth Circuit rejected this argument, citing back to the definition of “interrelated wrongful acts” within the insurance policy as broad and unambiguous. Additionally, the Court cited that both the 2006 and the 2010 lawsuits focus on the same issue, payment of the finder’s fee by Haymount to IBG.

Holding

The Fourth Circuit held that Continental was correct in refusing to cover Miller’s court expenditures for the 2010 lawsuit. Because the 2010 lawsuit and the 2006 lawsuit involve interrelated wrongful acts, they were part of the same claim under the policy. The Court affirmed the judgement of the district court.

On July 10, 2015, the Fourth Circuit issued its published opinion in Liberty Univ., Inc. v. Citizens Ins. Co. of Am., a civil case on appeal from the District Court for the Western District of Virginia. In this case, Liberty University, Inc. (“Liberty”) contended that Citizens Insurance Company of America (“Citizens”) breached its duty to defend and indemnify Liberty against claims that Liberty was directly and vicariously liable for participation in conspiracies to commit kidnapping and racketeering. The district court granted summary judgment in favor of Liberty, holding that Citizens had a duty to defend Liberty in the underlying action. The Fourth Circuit reversed, holding that the allegations in the underlying action triggered exclusions in the insurance policy; thus, Citizens had no duty to defend.

Underlying Complaint: Jenkins Complaint

The core of the underlying complaint involved a child that was allegedly kidnapped by one of the child’s parents. Janet Jenkins and Lisa Miller were joined in Vermont in a same-sex civil union and had one child. Miller was the child’s biological mother, and Jenkins was the child’s legal parent as of 2004. Miller subsequently converted to Christianity; moved to Virginia; and, believing homosexuality to be sinful, barred Jenkins from having contact with her daughter. Miller defied court visitation orders for years and, facing the possibility that custody of the child would be transferred to Jenkins, Miller absconded to Nicaragua with the child in 2009. Jenkins has not seen her daughter since.

Jenkins filed suit in 2012 against Liberty and a student worker at Liberty, among others, alleging that Liberty participated—both directly and vicariously—in the scheme to kidnap Jenkins’s daughter in order to disrupt the parent-child relationship. In this complaint (“Jenkins Complaint”), Jenkins alleged that Liberty and its agents helped Miller defy court visitation orders and abscond with the child to Nicaragua, all conducted through an alleged pattern of racketeering by Liberty and its agents that included various transportation schemes and guidance by Liberty University School of Law administrators. Moreover, the Jenkins Complaint alleged that Liberty and its agents enabled Miller to remain outside of the country through fundraising via social media. Finally, the Jenkins Complaint alleged that Liberty routinely instructed its law students that the correct course of action for a person in Miller’s situation would be to engage in civil disobedience and defy court orders.

Based on these facts, the Jenkins Complaint alleges that Liberty was (1) directly liable for its involvement in the kidnapping scheme, and (2) vicariously liable because it “promoted, condoned, and explicitly ratified its agents’ tortious racketeering activity.”

Insurance Policy Provisions

Coverage Provisions. The policy at issue contained two coverage forms: (1) Commercial and General Liability coverage (“CGL”) and (2) School and Educators Legal Liability coverage (“SELL”). The CGL itself had two subsidiary coverage forms: “CGL A” and “CGL B.”

CGL A. Under CGL A, Citizens was required to defend suits against Liberty seeking damages for “bodily injury” and “property damage” arising from an “occurrence.” An “occurrence” was defined in the policy as “an incident that was unexpected from the viewpoint of the insured.” This would necessarily exclude intentional torts from the scope of an “occurrence,” and CGL A specifically excluded injury or damage “expected or intended from the standpoint of the insured.”

CGL B. Under CGL B, Citizens was required to defend suits against Liberty alleging “personal and advertising injury,” including false arrest, detention, or imprisonment. CGL B contained two exclusions: (1) a Criminal Acts Exclusion, which excluded any injury arising out of a criminal act committed by or at the direction of the insured; and (2) a Knowing Violation Exclusion, which excluded any injury caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict the personal or advertising injury.

SELL. Under SELL, Citizens was required to defend suits against Liberty alleging injury arising out of a wrongful act and seeking loss because of such injury. SELL contained an Intentional and Criminal Acts Exclusion, which excluded coverage for any claim arising out of an intentional, dishonest, fraudulent, criminal, or malicious act or omission or any willful violation of law by the insured. This exclusion applied regardless of whether the person seeking coverage actually participation in the intentional or criminal acts or omissions.

Separation of Insureds Provision. The insurance policy also contained a Separation of Insureds provision. When multiple named insureds claim the right to a defense against the same suit, this provision requires the insurer to evaluate the claims against each insured individually, treating each as if he or she has separate coverage. Thus, excluded conduct by one insured does not preclude claims brought by other insureds. In this case, the policy named Liberty’s employees, volunteers, student groups, and officers as additional named insureds.

Procedural History

The district court granted summary judgment in favor of Liberty, finding that a duty to defend existed under all three coverage forms given the Separation of Insureds provision. The district court reasoned that the separation provision displaced the ordinary respondeat superior rule that imputes an agent’s intent onto the principal. Thus, while the allegations against the Liberty agents solely consisted of intentional acts, this intent should not be imputed to Liberty for the purposes of determining policy coverage. The Fourth Circuit held that this interpretation was erroneous and reversed the district court’s grant of summary judgment.

Virginia Insurance Law

This case arises out of diversity jurisdiction, requiring the application of Virginia law and its choice of law rules. Specifically, to determine an insurer’s duty to defend a lawsuit, Virginia applies the “Eight Corners Rule,” which compares the “four corners” of the underlying complaint with the “four corners” of the policy to determine whether the allegations in the underlying complaint come within the policy’s coverage.

The insured has the initial burden to establish a duty to defend, a duty that arises whenever the underlying complaint alleges facts and circumstances, some of which would, if proved, fall within the risk covered by the policy. Even if only one of multiple alternative theories falls within the coverage agreement, the insurer has a duty to defend against all claims. If the insured demonstrates that the complaint alleges a covered injury, the burden shifts to the insurer to show that the policy’s exclusionary language clearly and unambiguously excludes the alleged act or omission from the policy’s coverage. Any ambiguities in the exclusions are construed against the insurer.

Analysis: No Duty Existed

Applying the above framework, the Fourth Circuit held that the district court erred in determining that a duty existed in this case given the language in the Jenkins Complaint and the various coverage exclusions.

No “Occurrence” for CGL A Coverage. Contrary to the district court’s assertion, the Fourth Circuit held that, because the Jenkins Complaint only alleged Liberty’s liability for intentional conduct, it did not plead an “occurrence” for coverage under CGL A. Under Virginia law, an agent’s state of mind is ordinarily imputed to the principal. Thus, an intentional tort cannot be considered unexpected, even when viewed from the standpoint of the employer, and it does not become an “occurrence” simply by operation of respondeat superior.

The Court noted that the Separation of Insureds provision did not displace Virginia’s rule that an agent’s intentionally tortious act cannot be “unexpected” by the principal who is vicariously liable for the act. The Court reasoned that, even if the only defendant in the action was Liberty (the principal), the Jenkins Complaint still frames Liberty’s liability in terms of respondeat superior, which requires an imputation of intent from Liberty’s agents. The separation provision did not affect this imputation.

Moreover, even if the language were ambiguous, Virginia law requires courts to interpret insurance policies consistent with the parties’ intent. This requires avoiding an absurd result that enlarges the obligations of the insurer in order to create a windfall to the insured. Here, the Fourth Circuit found that failing to impute the agent’s intent would impose a duty to defend that is enlarged from the parties’ original intent to only defend against claims of unintentional acts, thereby creating a windfall to Liberty by effectively nullifying the exclusion for intentional injuries. Because the Jenkins Complaint alleged only intentional acts, the Court found that it did not allege any damages that resulted from an “occurrence” as required under CGL A.

Finally, the Court also noted that, when determining whether coverage exists, Virginia courts do not evaluate whether a complaint sufficiently alleges facts to support a claim such that it would survive a motion to dismiss. Instead, the court should only determine whether the complaint alleges facts that fall within the four corners of the policy; the claim’s probability of success is inconsequential. Here, the Fourth Circuit found that the Jenkins Complaint alleged facts and circumstances that demonstrate liability for kidnapping and racketeering. Thus, the Court held that Citizens had no duty to defend Liberty under CGL A.

Excluded from CGL B Coverage. Coverage under CGL B required “personal and advertising injury.” The Fourth Circuit held that, even assuming the Jenkins Complaint alleged such an injury, the Criminal Acts Exclusion in CGL B, which excluded injuries “arising out of a criminal act,” clearly applied. The Court noted that an injury “arises out of” an event when there is a causal connection between the event and the injury. Here, the Court found that the Jenkins Complaint (1) clearly and unambiguously alleged that Liberty and its agents committed criminal acts, and (2) clearly and unambiguously alleged that Liberty was liable for injuries arising out of those acts. Thus, a casual connection between the alleged criminal acts and the claimed injuries was sufficiently alleged, and the Court thus held that Citizens had no duty to defend Liberty under CGL B given the Criminal Acts Exclusion.

Excluded from SELL Coverage. Similar to CGL B, the SELL coverage provision included an Intentional and Criminal Acts Exclusion, which excluded claims “arising out of any intentional, dishonest, fraudulent, criminal, or malicious act or omission or any willful violation of law by the insured.” As emphasized in the CGL B analysis, the Jenkins Complaint alleged Liberty’s liability for injuries arising from its direct involvement in conspiracies to commit kidnapping and racketeering, all of which carry criminal penalties. Thus, the Court held that these claims clearly and unambiguously triggered the Intentional and Criminal Acts Exclusion, and Citizens thus had no duty to defend Liberty under SELL.

Reversed, Vacated, and Remanded

In sum, the Fourth Circuit held that Citizens had no duty to defend Liberty against the Jenkins Complaint under any of the coverage provisions. The judgment of the district court was reversed, the awards of fees and costs vacated, and the case remanded for further proceedings.

The Fourth Circuit issued a published opinion on June 10, 2015 in the civil case of Capital City Real Estate, LLC v. Certain Underwriters at Lloyd’s London. Capital City Real Estate (Capital City) filed a declaratory action against Underwriters at Lloyd’s London (Underwriters) seeking a declaration that the Underwriters had a duty to defend Capital City in an underlying tort action. Finding that the insurance policy covered Capital City as an additional insured in the underlying tort claim, the Fourth Circuit reversed the District Court of Maryland’s grant of summary judgment in favor of the Underwriters.

The Insurance Policy and Underlying Tort Claim

Capital City was the general contractor on a renovation project in Washington D.C., a project that required excavation, structural, and underpinning work. Capital City hired Marquez Brick Work, Inc. (Marquez) as a subcontractor to complete the foundational, structural, and underpinning work. Capital City and Marquez entered into a sub-contract that required Marquez to indemnify Capital City for damage caused by Marquez’s work and to maintain general liability insurance with a policy that named Capital City as an additional insured. Underwriters issued an insurance policy to Marquez, and shortly thereafter issued an endorsement amending the policy to provide coverage to Capital City, but only with respect to liability caused, in whole or in part, by the acts or omissions of Marquez.

After the policy became effective, a support wall at the site collapsed and damaged the adjacent property, which was owned by Leon Yates and insured by Standard Fire Insurance Company (Standard Fire). Standard Fire filed suit against Capital City and others, but made no mention of Marquez in the complaint. The complaint alleged that Capital City submitted plans for a building permit that did not detail the excavation or the plans for support to the underpinnings or common walls of the project. The complaint attributed the wall’s collapse to the negligence of Capital City. Capital City filed a third-party suit against Marquez, alleging that the subcontract required Marquez to defend and indemnify Capital City against claims for liability where the subject of the suit was Marquez’s work.

After the Underwriters denied coverage, Capital City filed a declaratory judgment action in the District Court of Maryland, seeking a declaration that Underwriters have a duty to defend the company in the underlying tort action. Both parties filed cross-motions for summary judgment, and the District Court ruled in favor of the Underwriters.

Choice of Law and the Test for Determining an Insurer’s Duty to Defend

The Fourth Circuit determined that Maryland law applied because the appeal stems from a diversity action filed in the District of Maryland and because Maryland follows the principle of lex loci contractus. This principle requires the application of the state’s law where the contact was made, as indicated by where the ultimate act occurred that made the contract binding. Perini/Tompkins Joint Venture v. Ace Am. Ins. Co., 738 F.3d 95, 100 (4th Cir. 2013). Here, the ultimate act that made the policy binding was its delivery, which occurred in Maryland.

To determine whether the insurer has a duty to defend an insured in an underlying action, Maryland courts apply the two-part test articulated in St. Paul Fire & Maritime Insurance Co. v. Pryeski, 438 A.2d 282 (Md. 1981). The test first considers the scope of the coverage and the defenses available under the policy based on the language and requirements of the policy, and then considers whether the underlying tort allegations for which coverage is sought potentially bring the claim within the policy’s coverage. Id. at 285.

The Fourth Circuit noted that Maryland does not follow the traditional rule that insurance policies are to be construed against the insured, but instead follows ordinary contract principles. Empire Fire & Marine Ins. Co. v. Liberty Mut. Ins. Co., 699 A.2d 482, 494 (Md. 1997). One such principle is that a policy is to be construed against the drafter, in this case, Underwriters. Id. The Court articulated the well-established principle that when a contract’s terms are unambiguous, they must be given their ordinary meaning. Kendall v. Nationwide Ins. Co., 702 A.2d 767, 76 (Md. 1997).

In Maryland, an insurer must defend against the underlying claim if there is potentiality that the claim could be covered by the policy. Cont’l Cas. Co. v. Bd. of Educ., 489 A.2d 536, 542 (Md. 1985). To determine whether there is potentiality of coverage, courts generally look to the pleadings, but the insured may use extrinsic evidence to demonstrate potentiality where the allegations of the complaint are unclear. Aetna Cas. & Sur. Co. v. Cochran, 651 A.2d 859, 863, 866 (Md. 1995). This policy ensures that an insured “is not foreclosed from receiving the defense to which it is entitled merely because the complaint fails to plead allegations that establish potentiality of coverage.” Id.

The Fourth Circuit Determined that the Underlying Tort Claim was Within the Scope of Coverage and that the Underwriters Owed a Duty to Defend Capital City

The Court found that the relevant part of the policy was based upon a form supplied by the Insurance Services Office (ISO), which develops standard policy forms that it files with each state’s insurance regulators. Although the Maryland appellate courts have not addressed the language at issue here, the Fourth Circuit looked to interpretations by the Fifth Circuit Court of Appeals as well as by insurance law commentators in deciding that the language of the policy covers Capital City in the underlying tort claim. These sources both teach that the language of a policy creates a duty to defend if the underlying claim alleges that the named insured or one acting on its behalf caused the damage. In this case, Underwriters argued that the policy only covered Capital City against vicarious or derivative liability, but the Fourth Circuit rejected this argument because the policy omitted any such limitation. The Court concluded that the plain language “provides for exactly what it says: coverage to Capital City for property damage caused by Marquez.” The Court further found that, even if construed as ambiguous, the policy covered Capital City for property damage caused in whole or in part by Marquez because the Court is obligated to construe the policy against the Underwriters, as the drafters of the contract.

The Fourth Circuit next considered whether the underlying allegations brought by Standard Fire potentially brought the tort claim within the coverage of the policy. The Court found that although the underlying complaint was silent about Marquez’s involvement in the wall’s collapse, it alleged that Capital City negligently failed to properly excavate and support the structure. It was, however, undisputed that Marquez was involved in the excavation and support work. Additionally, Capital City filed a third-party action against Marquez and also proffered extrinsic evidence to demonstrate that Marquez caused the wall’s collapse. Underwriters contended that the underlying complaint sought damages on the theory that Capital City failed to submit appropriate construction plans in its application for a building permit. The Fourth Circuit found that it would be “absurd to think that such allegations rest solely on the submission of construction plans,” and not on negligence in the actual construction work. The Court found that there is potentiality of coverage and that the Underwriters have a duty to defend Capital City in the underlying tort action.

Grant of Summary Judgment Vacated and Remanded

The Fourth Circuit held that the policy coverage extended beyond the acts or omissions of Marquez for which Capital City was vicariously liable, and covered the underlying tort claim. It further concluded that the underlying tort complaint created a potentiality of coverage. The Court therefore reversed the grant of summary judgment and remanded for a determination of whether Capital City is entitled to recover its expenses, including attorney’s fees.

On May 5, 2015, the Fourth Circuit issued its published opinion in the civil case of Certain Underwriters at Lloyd’s v. Cohen. This case (in federal court under diversity jurisdiction) involved an insurer’s rescission of disability insurance policies due to alleged material misrepresentations on the policy applications. The Fourth Circuit reversed and remanded the summary judgment that was granted in favor of the Underwriters on two main grounds. First, the Court held that three questions on the policy application were facially ambiguous; thus, the applicant’s answers were not, as a matter of law, “material misrepresentations” that justified rescission of the policy. Second, in a matter of first impression, the Court held that Consent Orders from the Maryland State Board of Physicians are inadmissible as evidence in a criminal or civil action given the plain language and legislative history of § 14–410 of the Maryland Code, Health Occupations Article.

Dr. Cohen’s Insurance Application and Consent Order to Suspend His Medical License

On April 1, 2011, Dr. Max Cohen submitted several initial applications for disability insurance to an authorized broker of the Underwriters. Dr. Cohen’s responses to three of the application questions were at issue:

“Are you actively at work?”—”Yes.”

“Are you aware of any fact that could change your occupation or financial stability?”—”No.”

“Are you party to any legal proceeding at this time?”—”No.”

These responses were submitted with the initial policy applications as well as with the final applications, which were signed on August 8, 2011. The policies became effective on that date.

Shortly after submitting the initial applications (but before signing the final applications), Dr. Cohen signed a Consent Order with the Maryland State Board of Physicians (the “Board”). This Consent Order suspended his license to practice medicine in Maryland for three months beginning on August 2, 2011. This Consent Order required Dr. Cohen to wind down his practice and refer all patients to other doctors during the three-month period. If he returned to active practice after the suspension, he would be placed on probation for five years. Dr. Cohen also maintained a license to practice medicine in the District of Columbia, and this license was not affected by the Consent Order.

On September 8, 2011, one month after the disability policies went into effect, Dr. Cohen sought medical treatment for injuries he sustained from a fall. The insurance agent notified the Underwriters of a possible insurance claim, and their efforts to investigate and adjust the potential claim led them to uncover the Consent Order. They notified Dr. Cohen that they intended to rescind the policies and issued him a refund check for his premium payments.

Asserting that Dr. Cohen made material misrepresentations on his applications for insurance, the Underwriters sought a declaration by a magistrate judge that their rescission was proper. During this proceeding, Dr. Cohen filed a motion in limine to exclude all references to the Consent Order, which was denied. The magistrate judge granted summary judgment to the Underwriters, concluding that the Underwriters validly rescinded the insurance policies because Dr. Cohen made material misrepresentations on his application.

Maryland’s Rule for Material Misrepresentations

In the first part of its opinion, the Court identified two requirements for a valid rescission of an insurance policy on the basis of a “material misrepresentation.” Under Maryland law, the court must determine: (1) whether the policyholder made a false statement on the application, and (2) whether the false statement was material to the risk assumed by the insurer. These are typically questions of fact for the jury unless the insurer demonstrates falsity and materiality by “uncontradicted or clear and convincing evidence,” thus making them questions of law.

Ambiguous Questions and Undefined Terms

The Court noted that insurance policies must be construed under contract principles, and policy terms are given the meaning a “reasonably prudent layperson would attach.” Policy language is ambiguous if it is “general” and “suggests two meanings to a reasonably prudent layperson.” The court applied these principles to the three questions at issue.

1. “Are you actively at work?”—”Yes.”

The Court found this question to be ambiguous. The Underwriters interpreted this language to indicate that Dr. Cohen was performing surgery on a daily basis. Dr. Cohen interpreted this language more broadly, noting that he was still a licensed surgeon and performed various duties at his office related to his practice (including research, administrative work, and professional development). The Court found that both interpretations were reasonable—the application did not define the phrase “actively at work,” did not restrict the work to Maryland, and did not provide that “actively at work” requires performance of any specific “daily duties” that may have been listed elsewhere in the application.

2. “Are you aware of any fact that could change your occupation or financial stability?”—”No.”

The Court also found this question to be ambiguous. The Underwriters contended that “financial stability” (another term undefined in the application) only referred to active income, not net worth, since disability insurance only protects active income. Dr. Cohen interpreted this language to include net worth as well as his “active practice” in D.C. The Court found that “financial stability” is a broad term that could refer to net worth; a figure that did increase during Dr. Cohen’s suspension.

3. “Are you party to any legal proceeding at this time?”—”No.”

The magistrate judge found that this question was ambiguous, and the Fourth Circuit affirmed that finding. The application did not define “legal proceeding.” While the Board proceedings had many characteristics of a legal proceeding (including representation by counsel and the resulting Consent Order—a legal document), no court was involved, and persons subject to a Board proceeding could conclude that, by agreeing to the Consent Order, they are able to avoid a legal proceeding.

Because these questions were ambiguous, the Court held that summary judgment was inappropriate.

The Consent Order

The Court then turned to the the denial of Dr. Cohen’s motion in limine to exclude all references to the proceedings and documents connected to his Consent Order with the Board.

Md. Code Ann. Health Occ. § 14–410 squarely addresses this issue. Except by express stipulation and consent of all parties in a proceeding before the Board: “(1) The proceedings, records, or files of the Board . . . are not discoverable and are not admissible in evidence; and (2) Any order passed by the Board . . . is not admissible in evidence” in a civil or criminal action.

In evaluating the plain meaning of the statute, as well as the legislative history, the Court held that Board orders are not admissible in a civil or criminal action absent consent, except for an action brought by a party aggrieved by a Board decision.

Reversed and Remanded

The Fourth Circuit reversed the district court’s judgment and remanded the case.